Shorter-term T-note yields soar on fears of Fed tightening

But they aren’t safe when the market begins to believe that the Federal Reserve will start tightening credit -- which is the way more bond traders suddenly are leaning.

The yield on the two-year T-note has soared to 1.41%, up from 1.30% on Friday and 0.96% on Thursday. That’s a massive move in the space of two trading sessions.

Yields on longer-term Treasuries have been rising relentlessly since mid-March, but shorter-term Treasury rates have mostly been flat. Shorter-term yields key off expectations for the Fed’s benchmark rate, which the central bank has been holding between zero and 0.25%.

Moreover, the Fed has repeatedly pledged to hold its rate at "exceptionally low levels . . . for an extended period."

But growing optimism about an economic rebound in the second half of this year has raised the prospect of a Fed rate hike sooner rather than later. That sentiment deepened on Friday, after the government reported that the economy in May lost fewer jobs than expected.

"People are starting to face that question, where even a month ago they didn’t even think it was a possibility," said Tom Di Galoma, bond trader at Guggenheim Capital Markets in New York.

In futures markets, traders now put a 43% probability on the Fed raising its key rate to 0.5% at its November meeting, up from a 23% probability a week ago.

November is a long way off, but just the scent of a change in the Fed’s stance is enough to send some investors scrambling out of lower-yielding fixed-rate bonds, figuring that all interest rates will move higher. Why wait?

It also doesn’t help that the Treasury is coming to market with a slew of new bonds this week. Uncle Sam will sell a total of $65 billion of three-, 10- and 30-year issues beginning Tuesday.

As noted, longer-term Treasuries already have sold off drastically this year, and yields continued to rise today, reaching 3.91% on the 10-year T-note, up from 3.86% on Friday. That will put more upward pressure on mortgage rates – exactly what the housing market doesn’t need.